So here’s the story, starting a start up is hard. There are lots of things to think about, the bottom line is always one of them. How do you make money so that you can pay your team and have enough left to keep developing your business? Forget paying yourself for the moment, just focus on paying the talent that is moving your idea forward. Love it or hate it, this is business and it doesn’t change in the startup scene.

As of recent, I’m worried because there are serious changes being considered in relation to Canada’s Scientific Research and Experimental Development (SR&ED) tax credit. If you’re a Canadian start up, you should be as well. In the past and to date, SR&ED has allowed start ups to offset the cost of operations while running a great team with competitive salaries to retain talent. There is a growing concern that changes to the SR&ED program are in the works, this could have enormous implications on Canada's ability to commercialize its research and development investments. Doing what you love, making money, paying your team, developing ideas could get a whole lot harder for start ups in Canada.

Changes to the SR&ED program advocated in the report of the Expert Panel Review of the Federal Support to Research and Development are particularly worrisome. This includes the proposal to shift away from a universal tax credit approach to one that relies more heavily on individual judgment and puts labour costs at the forefront of government sponsored R&D support. This could negatively impact those in high-tech.

It is obvious, the level of R&D support for high technology companies must be maintained and indeed enhanced if Canada is going to continue to participate in the high-tech industry. If you’re a Canadian startup, then SR&ED should already be in your financial toolbox. Reducing this credit or taking it away will severely affect the performance and traction that start ups have worked hard to gain. The SR&ED program is an invaluable competitive advantage for Canadian high-tech companies. If said changes are going to happen it is unlikely that the support levels for R&D will be offset with venture capital funds.

We need to be a united front on this. We need to safeguard the SR&ED program. Reducing refundability will evidently hurt each startup’s ability to raise capital; anyone can see the long term effects of this one. As it currently stands SR&ED is helping start ups survive in Canada rather than moving to the US to build and grow a company. Program changes highly reduce predictability for startups (an ecosystem that is already unpredictable by nature). The current clear eligibility criteria helps start ups plan and include SR&ED into their business model.

If possible changes are to be made, it is worthwhile to consult with startups and investors who are active in this space, as they are directly impacted by this program.

Canadian start ups, speak up. What are your thoughts? Let’s be proactive.

Great post. No question government support needs to be continued and enhanced. At the same time, there needs to be a focus on the commercialization of SR&ED, which personally, I think has been lacking over recent years. A lot of great work happens on the R&D front in Canada, but it seems that so little of it makes it to market. I'm sure this causes great concern for the government as they ultimately want to ensure that R&D dollars are achieving commericalization.

Agree with your concerns of individual judgement in assessing what should or should not receive funding.

I agree 100%. High-tech startups are starved for cash in Canada, and in many cases, their only recourse is SR&ED. Without SR&ED, entrepreneurs will have less incentive to stay in Canada and we may experience a brain drain to the US.

"This includes the proposal to shift away from a universal tax credit approach to one that relies more heavily on individual judgment and puts labour costs at the forefront of government sponsored R&D support. This could negatively impact those in high-tech."

How could this negatively impact a high-tech team? If hours are being spent on true R&D - it sounds like the proposed changes are in place to help optimize the program, rather then negatively impact our return. There's lots of SR&ED fraud going on - if this alleviates the issue, maybe more funds will be available for companies that are *actually* innovating.

Reply

Devon

03/26/2012 9:45am

Interesting point Mike, and definitely worth considering. From that report on SRED the purpose of the proposed changes was to make the filing process simpler and much more labour-based, so for those of us in software startups those goals are definitely a positive sign. The labour-based costs are certainly concerning to folks in manufacturing or bio-tech companies where overhead costs are high. I guess the fundamental question comes down to what the government wants to put focus on, in this case it probably improves things for software companies.

The concern is probably more on mention of reducing the refund-ability of the credit, from an early stage perspective that's quite concerning, as most of those tech startups are burning $, not yet making it. Hopefully that piece of the program is left un-touched.

"I guess the fundamental question comes down to what the government wants to put focus on."

Isn't that the crux of the problem? The government has a poor track record of picking winning companies or industries... Getting a cash-refund is hugely beneficial for startups. Is it possible to reliably differentiate between the companies they are actually looking to subsidize (future high-growth, job creating enterprises) and the companies that are surviving grant-to-grant and/or abusing the generosity of the program?

This "individual judgement" sounds like a recipe for more government jobs. There is so much wasted effort in these government processes, with duplicated efforts at every level of government & with every different program.

Reply

Yuri

03/27/2012 10:01am

Skeptical of the Conservatives recently... more bureaucratic oversight might just mean more appointees to eat up budgets and direct the money to whatever industries (tar sands?) look like good 'amakudari' openings for MPs.

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